Ruminations of an Israeli-American Venture Capitalist Looking for the Best and Brightest Entrepreneurs

Friday, May 15, 2009

Clouds with Silver Linings

It is no secret that the costs of launching an Internet or software company have come down dramatically in the past decade, due to new programming languages, open source software, and ever declining server and bandwidth costs. At Bessemer, we actually calculated that cost of launching a web site application declines 50% every 18 months… one key reason we favor companies that leverage the web.

Much like the broadband build-out race of the last decade, today we see a host of companies prepared to spend billions to build out data centers(aka “clouds”) which they aim to resell as a monthly service. While some technology companies may profit from selling into these cloud networks with core infrastructure, such as management software and virtual appliances... many more will find their fortunes by properly leveraging this massive investment by others(even if some cloud companies ultimately go the way of some quixotic broadband companies).

On the face of it, cloud computing and storage services like Amazon Web Services, Joyent, Nirvanix and Mosso, are yet another example of the ever declining cost curve for web start-ups. However, cloud services are riding their own steep cost curve as these massively scalable data centers reach economies of scale and deploy cutting edge technologies becoming far more efficient, responsive, and flexible than anything known in the hosting business. The upshot is that start-ups will be able to craft their own virtual data center and pay a monthly fee only for what they use. Many of the initial customers of these services are in fact Web start-ups, but most are simply using clouds to cut costs or offload peak demand. In the coming 18 months, I expect to see many more business plans that rely heavily on this incredible resource, previously available to only the most well financed in the industry.

Lower start-up infrastructure costs will enable entrepreneurs to test more innovative product concepts, many of which were previously prohibitive from a cost standpoint. Many of these new product concepts will also involve experimenting with daring business models that can upend the established order. On this latter point, I anticipate we will see start-ups using the cheap data center infrastructure to give away more products and services that might otherwise have been paid for. Not unlike web start-ups today, these companies would then recoup their infrastructure costs and profit through premium versions and/or through lead generation revenue models. I will admit there is a fine line and overlap between your typical Web or SaaS company and start-ups that I consider to leverage the cloud. Lets just assume that in the latter case, the start-ups' product concept or marketing/distribution strategy rests even more heavily on rapidly declining computing and storage costs. Panda Security’s recent release of a free anti-virus solution might be one such example, as are the free desktop in the cloud service of G.ho.st.

In many instances, successful cloud applications will be those that are able to put a premium face on a commodity infrastructure in order to benefit from an ever widening price differential. In other words, these companies will use their own technology innovation to deliver proprietary service or application, while enjoying the ever declining costs of the cloud infrastructure. I don't refer to the myriad online storage and file sharing vendors, but new services that marry their own intellectual property to a commoditized cloud infrastructure. There aren’t too many examples just yet, but IT Structures , HD Cloud and Ctera are several companies that come to mind, and are worth watching closely.

This is the first of several posts I intend to write on cloud trends, as it the intersection of some of the dominant growth trends in today's technology market, including SaaS, Web applications and data center consolidation/virtualization.

Bessemer Blogs

StatCounter

Update Your Followers About My Blog

The thoughts and opinions expressed herein belong to the author and do not necessarily reflect those of Bessemer Venture Partners or any of its affiliates (“Bessemer”). The material here is written on the author’s own time for [his/her] own reasons and Bessemer has not reviewed or approved the information herein. Any discussion of topics related to Bessemer or its investment activities should not be construed as an official comment of Bessemer.